Luker v. State Tax Assessor
Annotate this CaseAppellants Daniel Luker and several other attorneys appealed the grant of summary judgment to the State Tax Assessor on their petitions for review of tax assessments for the 2004 and 2005 tax years. The firm for which they worked was organized as a Maine limited liability partnership (LLP), with its principal place of business in Portland. While the firm was a limited liability corporation (LLC), each attorney joined as a member, but each worked out of the firm’s New Hampshire office. As members of a Maine LLC, the attorneys were required to pay Maine income taxes. In December, 2003, each attorney formed a New Hampshire professional corporation (PC) to hold his respective interest in the Maine LLC. When the firm reorganized as a LLP, each attorney transferred his respective partnership interest in the firm to their individual PCs. Each PC then signed a partnership agreement with the firm. Each attorney was the sole shareholder and director for his PC, and served as the PC’s president, treasurer and secretary. None of the PCs employed office staff or other attorneys. Each PC entered into an arrangement through which it was designated a “co-employer” of the attorney for purposes of firm profit sharing and benefits. In 2004 and 2005, each PC received partnership distributions from the firm. The size of the distribution depended on the performance of the attorney. The salary of each attorney roughly equated to the size of the distribution they received from the firm. Each PC deducted all payments to its respective attorney as a cost of doing business, thereby minimizing the PC’s taxable income. The State Tax Assessor viewed the creation of the PCs as an attempt to evade Maine income taxes, disregarded the corporate entities and assessed a tax on the distributions as income. The attorneys appealed the assessments. The district court granted summary judgment in the Assessor’s favor, and the Supreme Court agreed with the district court. The Supreme Court in affirming the lower court’s decision, held that each attorney individually, not his respective PC, earned the income from the partnership distributions, and must pay income taxes.
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